Clients often approach financial planning with numerous questions. What are the best steps for me? Can I avoid risk and still make money? How much risk is too much? How much will I lose if I make a mistake? What is the worst that can happen?
A multitude of anxious questions can lead to analysis paralysis. That glib name for a very real phenomenon seems to get more and more use in an increasingly complex market. With retirement concerns, lower investment returns, increased market volatility, unpredictable health care costs, and worries about aging, any attempts to plan for the future may lead to even more uncertainty. In the end, it is easy to see how a client could be overwhelmed into doing nothing.
In the past, it might have been sufficient to champion diversification and a commitment to a portfolio. But in turbulent times, a range of economic, political, personal, and other uncertainties can lead to deep-seated fears about doing any one thing. Clients who tolerate higher risk may be eager for even bigger returns and not satisfied with the tried-and-true advice that has been the bedrock of financial planners for decades. Without a crystal ball, the adviser's goal would be to alleviate their uncertainty, build greater tolerance for ambiguity, and help clients position themselves to take advantage of opportunities or address challenges as they arise.
Scenario analysis to the rescue
Whether the goal is to assuage a client's fears or to find the best choices for an adventurous investor, scenario analysis is the answer. This versatile tool helps planners assess potential future developments by using a systematic evaluation to identify potential events and results. Here is one key factor: It does not focus on one specific prediction but is instead adaptable to many possible outcomes.
When clients are overwhelmed by future uncertainty, scenario analysis provides them reasonable assumptions for creating a narrative for future outcomes based on specific steps taken. The narrative form is more accessible than random questions and the technical charts that may answer those questions. Clients can consider issues and potential events that are completely out of their control and use them to construct a series of scenarios they can use to build a financial plan that leaves them feeling as if they are in control.
The four goals of the process are to:
* Minimize client stress by removing uncertainty;
* Identify and consider risk...